A true sale is a sale of assets in which the seller (the originator) no longer retains any significant economic interest in the assets. A true sale is sometimes referred to as a "genuine sale" or a "real sale".
There are a number of factors that can be used to determine whether a sale is a true sale. These factors include:
- The transfer of legal title: The seller must transfer legal title to the assets to the special purpose vehicle (SPV).
- The transfer of economic interest: The seller must not retain any significant economic interest in the assets. This means that the seller must not be able to control the assets or benefit from the cash flows from the assets.
- The documentation: The documentation for the sale must be clear and unambiguous. The documentation must state that the sale is a true sale and that the seller no longer has any interest in the assets.
Here are some of the applications of true sales in securitisation:
- To create new products: True sales can be used to create new securitization products that meet the needs of different investors. For example, an issuer may issue a securitization with a different type of underlying asset, such as receivables or intellectual property. The true sale will need to be adapted to the specific type of underlying asset.
- To reduce risk: True sales can be used to reduce risk by ensuring that the investors have a valid claim to the cash flows from the underlying assets. This is because the investors will not be exposed to any losses if the seller retains any significant economic interest in the assets.
- To improve liquidity: True sales can improve liquidity by making it easier to sell the securitisation to investors. This is because investors will be more confident in the securitisation if they know that the seller has no interest in the underlying assets.
True sales are a valuable tool for securitisation. They can be used to create new products, reduce risk, and improve liquidity.